India’s New Plan to End Financial Untouchability

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NEW DELHI, India — On August 28, India’s prime minister, Narendra Modi, promised to end ‘financial untouchability’ in the country, announcing a plan to provide a bank account for every household. Modi, referring to Mahatma Gandhi in his attempt to end untouchability, has called for the end of financial untouchability. Almost 40 percent of Indians have little to no access to financial services and many are taken advantage of by moneylenders that charge absurd interest rates. Approximately only one-fifth of Indian adults saved any money in 2011 and of those, only half chose to keep their savings in a financial institution. Approximately 73 percent of farmers have no access to any formal source of credit. Called the People’s Wealth Plan, it hopes to provide bank accounts to 75 million households and have two account-holders per household by next year. Account holders would be provided with a debit card and accident insurance covering up to 100,000 rupees ($1,654.) Customers would also receive an overdraft facility of up to 5,000 rupees (roughly $82.05) after six months. If the program succeeds, it would provide much needed finances to households struggling in poverty. The demand for the program is evident, with 15 million households enrolling in the program through 70,000 accounting opening centers on the first day. In addition, the program would help welfare benefits and payments be distributed with more efficiency by feeding directly into bank accounts while also serving to reduce corruption. Currently the World Bank estimates that only 4 percent of Indians receive government payments through bank accounts. A McKinsey & Co. report found that the government could save up to $22.4 billion per year by paying directly into accounts. Furthermore, the scheme would effectively reduce the number of extortionist moneylenders and other informal lending agencies such as micro-financers that operate outside of the government’s control. The McKinsey & Co. report also found that providing financial services could generate $21 billion in bank revenues, which would account for than 20 percent of the total and make it the fastest growing sector at 18 percent. However, there are many potential pitfalls that could derail the success of the initiative. The success of the initiative is heavily reliant on bank profitability. With the potential adoption of millions with low financial literacy, banks could face excessive distressed loans. They currently make up around 10 percent of assets in the banking system, largely run by the state. Another deterrent to the program is the lack of documents required for opening a bank account. To open a bank account in India, identifying documents such as a birth certificate and proof of address need to be provided and for most in India, acquiring such documents is a monumental task. Central Bank governor Raghuram Rajan has said that banks would use “unique biometric identifiers,” a program launched by the previous government, to overcome the lack of documents. Moreover to combat the low access to banks, the government is encouraging the construction of ATMs and mobile banking, hoping to promote a new type of simple banks that focus solely on deposits and payments. Whether the initiative will be effective is unknown but the potential for changing the financial situation of millions in poverty is promising.

William Ying

Sources: Reuters, BBC, Wall Street Journal, Bloomberg

Photo: Flickr

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